Shipping volume has surged over the past year as retailers and manufacturers rush to replenish depleted inventories during the pandemic. This has resulted in rising demand for warehouse space, as manufacturers look to compensate for the shortcomings of just-in-time (JIT) production networks and increase “safety stock” to offset supply chain disruptions, such as the recent closure of the Suez Canal.

Figure 1: Total Business Inventories & Annual Change in U.S. Imports

brief-marketflash-global-supply-chain-volatility-figure-1 *Year-over-change percent change in U.S. import value goods, not seasonally adjusted.
Source: St. Louis FRED, CBRE Research, January 2021.

U.S. West Coast ports are experiencing historic shipping volume and congestion in a rush to increase inventories on shore. Year-to-date, loaded imports increased by 24.2% and 32.1% at the ports of Los Angeles and Long Beach, respectively. East Coast ports also have seen a significant uptick in volume: The ports of Savannah, Virginia and New York/New Jersey posted gains of 17.7%, 16.8% and 13.2%, respectively.

Figure 2: YTD U.S. Seaport Cargo Volumes

brief-marketflash-global-supply-chain-volatility-figure-2 *Loaded Twenty-Foot Equivalent Unit (TEU) imports indicates inbound container volumes with full containers.
Source: Various port authorities, CBRE Research, Q1 2020.

The recent blockage of the Suez Canal by the 220,000-ton Ever Given container ship underscores the fragile nature of global supply chains. The six-day blockage and resultant backup in container ship traffic traversing the canal held up approximately $10 billion in trade each day, according to Lloyd’s List.

Supply chain volatility further heightens the need for additional warehouse space to stockpile goods and mitigate future disruptions. CBRE Econometric Advisors estimates that a dollar increase in imports requires three times as much warehouse space as a dollar increase in exports (holding industrial production constant). Thus, a trend toward shorter, more resilient supply chains has gathered pace over the past year.

Many companies would prefer to store additional inventory near ports of entry; however, what little warehouse space is available in these markets is getting expensive. Seaport markets finished 2020 with an average vacancy rate of just 3.6%—1 percentage point lower than the national average. Only 75 million sq. ft. was under construction in these markets at the end of 2020, with more than a third of it preleased. The low amount of available supply has led to record-high rental rates.

Increased rents are leading to higher pricing of for-sale warehouse facilities, making the investment market even more competitive. While occupiers must overcome the “sticker shock” of higher rents in these markets, occupancy costs remain a low portion of overall supply chain costs. This will give landlords room to continue increasing rental rates for the foreseeable future.